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The Interest Rate Conditioning Assumption

Author

Listed:
  • Charles Goodhart

    (Financial Markets Group, London School of Economics)

Abstract

A central bank’s forecast must contain some assumption about the future path for its own policy-determined short-term interest rate. I discuss the advantages and disadvantages of the three main alternatives: (i) constant from the latest level (ii) as implicitly predicted from the yield curve (iii) chosen by the monetary policy committee (MPC) Most countries initially chose alternative (i). With many central banks having planned to raise interest rates at a measured pace in the years 2004–06, there was a shift to (ii). However, Norway, and now Sweden, has followed New Zealand in adopting (iii), and the United Kingdom has also considered this move. So this is a lively issue.

Suggested Citation

  • Charles Goodhart, 2009. "The Interest Rate Conditioning Assumption," International Journal of Central Banking, International Journal of Central Banking, vol. 5(2), pages 85-108, June.
  • Handle: RePEc:ijc:ijcjou:y:2009:q:2:a:3
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    References listed on IDEAS

    as
    1. Jansson, Per & Vredin, Anders, 2003. "Forecast-Based Monetary Policy: The Case of Sweden," International Finance, Wiley Blackwell, vol. 6(3), pages 349-380, Winter.
    2. Carriero, Andrea & Favero, Carlo A. & Kaminska, Iryna, 2006. "Financial factors, macroeconomic information and the Expectations Theory of the term structure of interest rates," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 339-358.
    3. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    4. Daniel L. Thornton, 2004. "Testing the expectations hypothesis: some new evidence for Japan," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 21-40.
    5. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    6. Glenn D. Rudebusch, 1997. "Interest rates and monetary policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun13.
    7. Michael Ehrmann & Marcel Fratzscher, 2007. "Transparency, Disclosure, and the Federal Reserve," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 179-225, March.
    8. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1161-1187, September.
    9. Stephen Morris & Hyun Song Shin & Hui Tong, 2006. "Social Value of Public Information: Morris and Shin (2002) Is Actually Pro-Transparency, Not Con: Reply," American Economic Review, American Economic Association, vol. 96(1), pages 453-455, March.
    10. Berg, Claes & Jansson, Per & Vredin, Anders, 2004. "How Useful are Simple Rules for Monetary Policy? The Swedish Experience," Working Paper Series 169, Sveriges Riksbank (Central Bank of Sweden).
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Ansgar Belke, 2010. "Financial Crisis, Global Liquidity and Monetary Exit Strategies," Ruhr Economic Papers 0183, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    2. repec:spr:empeco:v:53:y:2017:i:1:d:10.1007_s00181-016-1182-5 is not listed on IDEAS
    3. Belke, Ansgar, 2010. "Financial Crisis, Global Liquidity and Monetary Exit Strategies," Ruhr Economic Papers 183, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. Knüppel, Malte & Schultefrankenfeld, Guido, 2013. "The Empirical (Ir)Relevance of the Interest Rate Assumption for Central Bank Forecasts," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80042, Verein für Socialpolitik / German Economic Association.
    5. Tesfaselassie, Mewael F., 2009. "Looking forward: exiting unconventional monetary policy," Open Access Publications from Kiel Institute for the World Economy 32960, Kiel Institute for the World Economy (IfW).
    6. Nikola Mirkov & Gisle James Natvik, 2016. "Announcements of Interest Rate Forecasts: Do Policymakers Stick to Them?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(5), pages 901-920, August.
    7. Kool, Clemens J. M. & Thornton, Daniel L., 2015. "How Effective Is Central Bank Forward Guidance?," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 303-322.
    8. Christian Bustamante & Luis E. Rojas, 2012. "Constant-Interest-Rate Projections and Its Indicator Properties," BORRADORES DE ECONOMIA 009383, BANCO DE LA REPÚBLICA.
    9. Céline Antonin & Christophe Blot & Paul Hubert & Fabien Labondance & Catherine Mathieu & Christine Rifflart & Vincent Touze, 2013. "Politiques monétaires : est-ce le début de la fin ?," Sciences Po publications info:hdl:2441/6ggbvnr6mun, Sciences Po.
    10. repec:zbw:rwirep:0183 is not listed on IDEAS
    11. Peter Tulip & Stephanie Wallace, 2012. "Estimates of Uncertainty around the RBA's Forecasts," RBA Research Discussion Papers rdp2012-07, Reserve Bank of Australia.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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